What Is a Mortgage Constant and How to Calculate It?

Article Summary:

The mortgage constant is a ratio of your yearly debt service to your total mortgage loan amount. It shows what percentage of your mortgage you will be paying off each year. You can use the mortgage constant to decide if you can afford a home loan or to decide if an investment property will be profitable. Your lender can also make use of the mortgage constant to decide if you should get the loan you’re applying for.

If you want to buy a home or you’re already a homeowner, it is critical that you have as much information about your finances as possible. One important piece of information is the mortgage constant. Calculating the mortgage constant only requires a few pieces of information and is a quick and easy calculation. The mortgage constant will help you determine if a house is a reasonable purchase. It will also help you better manage your cash flow.

In this article, we will explain what the mortgage constant is, how it works, and how to calculate it. In case you are a potential real estate investor, we will also compare the mortgage constant to the capitalization rate, which you’ll find is a helpful tool for evaluating real estate investments.

What is a mortgage constant?

A mortgage constant is the percentage of your mortgage that you pay off each year. Mortgage constants are important pieces of information for both borrowers and lenders involved in the mortgage process. Knowing your mortgage constant can help you determine the total cost of buying a home. It can also help you compare mortgage rates to determine which is the most affordable option.

Thus, the mortgage constant, like the interest rate, expresses the cash cost of borrowing money. Because of this, the mortgage constant is often quoted as an indicator of borrowing costs in a manner similar to the interest rate.” — Wayne E. Etter, Real Estate Center, Texas A&M University

Your bank may use your mortgage constant to decide whether to give you a loan. The constant helps lenders decide whether a borrower has enough income to cover the cost of a loan. Lastly, if you are in real estate, you can also benefit from knowing the mortgage constant. It can help you decide whether a property is a profitable investment.

Though useful, the mortgage constant is just one piece of information about a mortgage. Mortgages and the mortgage industry are complex subjects. Understanding them well requires some effort. One great way to start learning about them is to read SuperMoney’s comprehensive study.

How mortgage constants work

Mortgage constants are valuable pieces of information. They tell you the percentage of money paid each year to service a debt compared to the total loan value. This annual debt service is the amount you pay toward principal and interest on your loan every year. It does not include other parts of your mortgage payment such as property taxes and insurance.

Importantly, mortgage constants only work for fixed-rate loans. The annual percentage rate (APR) does not fluctuate, so the calculation works. On variable-rate loans, in contrast, the APR fluctuates, which makes this calculation less useful. It will only tell you your exact cost of borrowing in the initial fixed-rate period, such as the first 10 years of a 10/1 ARM mortgage.

Your loan also must be closed-end in order to calculate the mortgage constant, which means that your lender provides the entire mortgage amount at once. On the other hand, an open-end mortgage does not provide the full amount at once, which means that you cannot calculate the mortgage constant. Read more about open-end mortgages here.

Another excellent way to learn about the various types of mortgages and their current rates is to review mortgage loan programs and offers, as well as unbiased reviews by real-life customers:

How to calculate your mortgage constant

To calculate your mortgage constant, you need to know the cost of your home, the loan term, your down payment, and your APR. Using this information, you can determine your monthly mortgage payment.

The mortgage constant at a particular interest rate always exceeds that interest rate because it includes the amount necessary to repay the loan over the life of the loan and pay the interest on the loan.” — Wayne E. Etter, Real Estate Center, Texas A&M University.

For example, let’s say you purchase a house for $400,000. You put a 20% down payment, or $80,000. Your loan term is for 30 years and your APR is 3.42%. With these values, any reliable mortgage calculator will tell you that your monthly payment toward principal and interest comes out to $1,422.69.

This figure, of course, doesn’t tell you what you’ll actually pay each month, since it excludes the monthly cost of property taxes and homeowners insurance. But since you don’t want to include these other expenses when calculating your mortgage constant, the calculators do give you the monthly amount you need to figure out your mortgage constant.

Now, we can use the calculated monthly mortgage payment of $1,422.69 to determine the mortgage constant.

Mortgage constant = (Annual mortgage debt service / Total loan amount) * 100

Remember that your annual mortgage debt service is the amount you pay toward principal and interest each year. Thus, your annual mortgage debt service is your monthly mortgage payment multiplied by 12 (for the number of payments you make each year).

Annual mortgage debt service = Monthly mortgage payment * 12

In this example, your annual mortgage debt service would be $1,422.69*12, which comes out to $17,072.28. This is a valuable number alone — it tells you how much you should expect to pay toward your loan every year, which is helpful for budgeting purposes.

Now, we can plug the numbers into the formula in order to determine the mortgage constant. Remember that your total loan amount is the cost of the home subtracting your down payment. In this case, your total loan amount is $320,000.

Mortgage constant = (17072.28/320000)*100

The result of this calculation is 5.34, which means that you are paying off 5.34% of your loan each year.

Pro tip: You can calculate your mortgage constant even if you are already paying a loan. Multiply your existing monthly mortgage payment by 12 and divide it by your total loan amount (importantly — not how much you have left on the loan amount, but how much the loan amount was at the start).

On the subject of your already having a mortgage that you’re paying off, have you considered refinancing? The following mortgage refinance calculator can help you decide whether it’s a good idea:

So, does the calculator indicate you should consider refinancing? If so, you can use SuperMoney’s advanced search tools to find just the right home refinancing for your needs:

Why do mortgage constants matter?

As discussed, mortgage constants are important for a variety of players in the process of applying for a mortgage. For you, the homebuyer or potential homeowner, a mortgage constant helps you understand the total cost of your home each year and determine if the yearly expense is feasible for you. You can also use a mortgage constant to compare loan options. A mortgage constant provides a bigger, long-term picture of the effect of your mortgage on your finances.

If you are a current homeowner, a mortgage constant helps you understand your cash flow and budgeting responsibilities. This is particularly helpful if you want to pay off your mortgage early. You can make multiple calculations to figure out how your mortgage constant will vary if you make additional early payments.

Banks will also use the mortgage constant when deciding whether to offer you a loan. Banks use the mortgage constant as a debt-coverage ratio. It helps them decide whether your income is sufficient to cover the mortgage payments.

Lastly, mortgage constants matter if you want to invest in real estate. In combination with other figures, the mortgage constant can indicate whether a property will be a profitable investment. To determine this, you can use the capitalization rate formula to compare the mortgage constant to the net operating income (NOI) you expect on the property. The capitalization rate formula is similar to the formula for the mortgage constant; all you need to do is to divide the annual NOI by the loan amount:

Capitalization rate = (annual NOI/loan amount)*100

If the capitalization rate is higher than the mortgage constant, the investment will likely be profitable.

Mortgage constant vs. Capitalization rate

Let’s explore an example of the mortgage constant versus the capitalization rate to determine if a rental property will likely be profitable. Using the same example house from above, we can estimate the NOI and calculate the capitalization rate. The NOI is the monthly rent minus any monthly expenses. In this example, we will say that the NOI is $1,600. Thus, the annual net income is $1,600*12, or $19,200. The total loan amount to purchase the property is $320,000. We can now calculate the capitalization rate:

Capitalization rate = (19200/320000)*100

The result of this calculation is 6.00%. If you remember, the mortgage constant from above was 5.34%. Since the capitalization rate is higher than the mortgage constant, this would be a profitable investment. By comparing these rates, a real estate investor knows that the expected annual NOI would cover the annual debt servicing costs.

Banks may also use this formula to determine whether to give you a loan. Instead of monthly rental income, the lender would substitute the borrower’s monthly earnings. The lender could calculate the annual NOI and debt yield. If it is bigger than the mortgage constant, the bank would know it is a smart decision to give you a loan.


How is the mortgage constant calculated?

The mortgage constant is calculated using this formula: Mortgage constant = (Annual mortgage debt service / Total loan amount) * 100. You will be left with a percentage that tells you your mortgage constant.

Why is the mortgage constant important?

The mortgage constant can help you determine how to budget your finances and compare your loan options. Your bank may also use the mortgage constant to determine whether to give you a loan. Lastly, mortgage constants are helpful if you are looking to invest in real estate property.

Key takeaways

  • The mortgage constant tells you the amount of debt you service each year.
  • This constant is only useful for fixed-rate mortgages or during the fixed-rate period of some adjustable-rate loans.
  • Mortgage constants can be helpful for homeowners and prospective buyers, helping them budget and determine whether a home purchase they’re considering is feasible.
  • Calculating your mortgage constant is simple and quick. The formula, Mortgage constant = (Annual mortgage debt service / Total loan amount) * 100, requires only a few numbers and is a handy tool to help you manage your finances.

Ready to secure a home loan?

If you are ready to secure a loan, we recommend reading about the best mortgage lenders and reading real customer reviews and loan offers.

View Article Sources
  1. 12 CFR Part 1003 (Regulation C) § 1003.2 Definitions — Consumer Financial Protection Bureau (CFPB)
  2. Calculating Mortgage Loans — — Real Estate Center, Texas A&M University
  3. Your mortgage calculator may be setting you up for a surprise — CFPB
  4. Mortgage Amortization Calculator — Mortgage Amortization
  5. Relevant materials from a leading mortgage lender — Quicken Loans
  6. Best Mortgage Lenders — SuperMoney
  7. Home Purchase Mortgages: Reviews & Comparisons — SuperMoney
  8. How to Get the Best Mortgage Interest Rate — SuperMoney
  9. Mortgage Industry Study — SuperMoney
  10. What Is a 10/1 ARM Mortgage? — SuperMoney
  11. What is an Open-End Mortgage? — SuperMoney